Is The McNulty Memorandum Morphing Into The Filip Letter

August 13, 2008 WCC Bulletin

Originally printed in the WCC Bulletin, the ABA's White Collar Crime newsletter.

In December 2006, after the efforts of many courageous criminal defense lawyers and one exceptional jurist, the United States Department of Justice (“DOJ”) released a memorandum authored by then Deputy Attorney General Paul J. McNulty (“McNulty Memorandum”) purportedly revising its position on corporate charging guidelines.[i] However, the debate did not end with the issuance of the McNulty Memorandum. The DOJ was forced—after intense pressure and proposed Congressional intervention—to retreat from its McNulty Memorandum positions. Recently, the DOJ notified Congress in a letter from the current Deputy Attorney General, Mark Filip (“Filip Letter”), indicating that the DOJ was intending to make certain changes to the McNulty Memorandum.[ii]

The McNulty Memorandum is a “roadmap” -- not a law -- but a DOJ policy used to instruct federal prosecutors when those prosecutors consider charging business organizations with crimes, evaluating cooperation, recommending remedial measures, and seeking the waiver of the attorney-client and work-product privileges from these entities. Although most of the ink spilled on the McNulty Memorandum by commentators discusses the waiver of the attorney-client and work-product privileges, critical portions of the McNulty Memorandum are seemingly ignored. This article addresses the principles relating to the federal prosecution of business organizations under the McNulty Memorandum as well as the criticism of the DOJ’s reliance upon corporate cooperation, including its requests to business entities to waive their corporate attorney-client and work product privileges and provide DOJ investigators with information that otherwise would have been protected. This article also addresses the debate that led to issuance of the Filip Letter as well the changes that are being considered.

Background

To no one’s surprise, the DOJ has adopted a very aggressive approach towards corporate crime. However, the DOJ is not alone among government regulators in this fight as well as the waiver debate. For example, the United States Securities and Exchange Commission (“SEC”) has relied upon its Seaboard guidelines,[iii] and others have promulgated standards to consider cooperation when making their charging decisions.[iv] Additionally, the McNulty Memorandum was not the DOJ’s first attempt to enunciate standards in this area. It previously issued, among others, the Thompson and Holder Memorandums, all seeking to outline standards for federal prosecutors when making these charging decisions. Despite all of this effort and the innocuous language used in describing these policies, these regulators effectively required business entities under investigation to disclose privileged and confidential information to obtain lenient treatment.

Some chose to challenge these policies. In particular, the Thompson Memorandum was challenged in United States v. Stein, before United States District Judge Lewis A. Kaplan.[v] Judge Kaplan questioned the constitutionality of the Thompson Memorandum, and found that federal prosecutors had violated the Fifth and Sixth Amendment Constitutional rights of the defendants with their practice of causing a corporation to stop the paying legal fees of those under investigation or prosecution.

In December 2006, the DOJ responded to the attacks on the Thompson Memorandum by defense lawyers and the federal court by outlining a new procedure for requesting privileged material from business entities in exchange for leniency in the context of the DOJ’s consideration of a corporation’s alleged misconduct. The result was contained in the McNulty Memorandum.[vi]

Duties of a Federal Prosecutor and Corporate Leaders When Charging the Corporation

Initially, the McNulty Memorandum discusses both the duties of the federal prosecutor as well as corporate leaders in the context of charging a business entity with a federal crime.

The McNulty Memorandum lays out general principles for charging a business entity, stating there should be no deferential treatment for business entities because of their artificial nature. Further, if an indictment is necessary, federal prosecutors are reminded of the “positive” benefits to a corporation from this process, including improved corporate governance, change of culture or behavior and a better ability to detect and deter future wrongdoing. The McNulty Memorandum stresses that federal prosecutors must consider all factors when faced with possible corporate wrongdoing. For example, federal prosecutors must consider whether the public would benefit from indicting a business entity, including, but not limited to, deterrence considerations and specific risks to the general public, as well as if there are remedial measures undertaken by the business entity. Federal prosecutors are also expected to consider charging individual directors, officers, employees or shareholders at the same time when reviewing whether to charge the business entity. Similarly, federal prosecutors should not deter individual action if the entity accepts full responsibility for a particular criminal activity.

Nonetheless, federal prosecutors investigating and prosecuting criminal wrongdoing are required to act professionally when discharging their duties, and consider (and encourage) corporate compliance and regulation. The DOJ assumes that business leaders are responsible for such actions and those leaders must protect the true owners of the business entity -- the shareholders. Federal prosecutors expect these leaders to work with them for the benefit of their shareholders (apparently, even if it is against the leader’s personal interest).

In sum, when making these charging decisions, federal prosecutors consider factors regardless of a direct or indirect benefit to the business entity, and view corporate leadership as the first line of defense -- an unenviable position if something goes awry.

The McNulty Memorandum’s Nine Factor Charging Test

The McNulty Memorandum discusses nine specific principles that federal prosecutors apply when determining criminal charges against a business entity.

Obviously, the first factor considers the nature and seriousness of the offense, as well as the risk and harm to the public from the corporate conduct. Federal prosecutors evaluate the nature and seriousness and harm to the public by considering specific DOJ policies to deter such harm in place at the time the business entity may have violated them. Violating such DOJ policies may indicate public harm, and result in charges against the entity by the DOJ.

The “pervasiveness of wrongdoing within the corporation” and if corporate management are involved in this wrongdoing comprise the second factor in this test while the third factor considers a corporation’s history of similar or like misconduct (criminal, civil or regulatory enforcement actions). If the crime was localized to a single or rouge employee, federal prosecutors may be less likely to charge the corporation, but evidence of involvement from corporate leadership will cause the DOJ to view the conduct as pervasive within the organization’s entirety. Nonetheless, the DOJ, when considering the corporation’s past history, will also recognize good corporate citizenship, before charging the entity.

The fourth factor considered is the corporation’s timely and voluntary disclosure of its wrongdoing and if it cooperated with the DOJ investigation. The DOJ values corporate cooperation, and we will discuss below its position concerning waiving the attorney-client and work-product privileges as part of cooperation. However, there is more to cooperation than these waivers. The DOJ considers whether a business entity will qualify for immunity, amnesty or pre-trial diversion based upon numerous factors such as whether it attempts to shield culpable employees and agents.

In United States v. Stein, for example, federal prosecutors were confronted with a business entity’s payment of legal fees for certain employees who were under federal investigation.[vii] The DOJ considered these payments an impediment to its investigation, and, essentially, forced the business entity to stop paying those legal fees. Although the court rejected the prosecutors’ heavy-handed practice, the McNulty Memorandum continues to stress that federal prosecutors must consider the payment of attorney’s fees to employees under investigation when instigating a criminal prosecution against the business entity. Finally, cooperation does not entitle the business entity to immunity, and providing cooperation does not mean immunity will be granted.

The DOJ’s fifth and sixth charging factors involve whether the business entity has undertaken any remedial action, including whether it implemented a corporate compliance program; improved an existing one; replaced or disciplined the wrongdoers or management; and/or paid restitution. Corporate compliance programs are critical in the DOJ’s assessment of whether to charge a corporation. The DOJ assumes these compliance programs are a proper way of affecting future corporate behavior. The McNulty Memorandum trumpets this requirement along with restitution and remediation when deciding the necessity of a criminal prosecution against the entity.

The seventh factor relates to the collateral consequences of DOJ actions. If those collateral consequences will harm shareholders, pension holders or employees, who are not involved in the wrongdoing, federal prosecutors must assess the impact of the corporate criminal conviction before deciding to charge the business entity with a criminal offense. Of course, the existence of these consequences does not stop criminal proceedings where there is merit as demonstrated in the fatal Arthur Anderson case.

Federal prosecutors must also consider the eighth factor as to whether there has been previous adequate prosecution of the individual or individuals responsible for the corporation’s wrongdoing.

Lastly, federal prosecutors must consider if there are adequate remedies in a civil or regulatory enforcement action before instituting a criminal prosecution. The DOJ will allow an adequate non-criminal alternative to an indictment, including, but not limited to, civil or regulatory enforcement actions, if the DOJ believes civil or regulatory enforcement may address these issues. Thus, the DOJ may consider not criminally charging a corporation, but it is equally possible that the DOJ may still bring criminal charges even if civil or regulatory enforcement actions have occurred or are threatened.

Privileged Material Under the McNulty Memorandum

Much of the defense bar’s angst concerning the McNulty Memorandum involves the DOJ’s approach to privileged material. The McNulty Memorandum addresses when federal prosecutors may seek privileged material from business entities in exchange for leniency in charging and sentencing. The McNulty Memorandum carefully provides assurances that the DOJ respects the attorney-client and work-product privileges, but clearly places limits on this largesse. The McNulty Memorandum, in particular, states that the:

“[w]aiver of attorney-client and work-product protections is not a prerequisite to a finding that a company has cooperated in a government investigation. However, a company’s disclosure of privileged information may permit the government to expedite its investigation. In addition, the disclosure of privileged information may be critical in enabling the government to evaluate the accuracy and completeness of the company’s voluntary disclosure.”[viii]

Although an attempt to provide comfort, the McNulty Memorandum only reinforces the DOJ’s ultimate desire to obtain confidential information, but in a more refined and procedurally oriented approach.[ix]

The McNulty Memorandum establishes that “[p]rosecutors may only request a waiver of attorney-client or work-product privileges from a business entity when there is a legitimate need for the privileged information to fulfill their law enforcement obligations.”[x] This new procedure suggests that the information sought is a legitimate need “if it is not established by concluding it merely desirable or convenient to obtain privileged information.”[xi] As a result (and from an apparent desire to afford some protection from overzealous federal prosecutors), the McNulty Memorandum establishes a balancing test for determining legitimate need.

The McNulty High Wire Balancing Test

The McNulty Memorandum requires federal prosecutors to balance the competing interests between the attorney-client and work-product privileges with law enforcement requirements for government investigations.[xii] Thus, when determining if a legitimate need exists, the McNulty Memorandum provides that federal prosecutors consider four factors:

“(1) the likelihood and degree to which the privileged information will benefit the government’s investigation;

(2) whether the information sought can be obtained in a timely and complete fashion by using alternative means that do not require waiver;

(3) the completeness of the voluntary disclosure already provided; and
(4) the collateral consequences to a corporation of a waiver.”[xiii]

If the federal prosecutor makes a determination that a legitimate need is present, the McNulty Memorandum outlines a standard process for senior DOJ management to approve such a request to obtain the privileged information from the business entity.

Federal prosecutors must, first, use the least intrusive means to obtain the information by seeking factual information relating to the underlying alleged corporate misconduct. The McNulty Memorandum characterizes this information as “Category I” information. Category I Information from a business entity, includes, among other things, documents, witness statements and other factual items that may have been uncovered by or created by corporate counsel.[xiv] To obtain Category I Information from a business entity, federal prosecutors must first obtain written authorization from the United States Attorney in their district, who must consult with the Assistant Attorney General for the DOJ’s Criminal Division, before granting or denying the request. Of course, if a corporation provides Category I Information to federal prosecutors, the McNulty Memorandum permits the production to be considered cooperation in the context of the government’s investigation.

Federal prosecutors may also seek other privileged information categorized as “Category II Information.” Category II Information includes privileged attorney-client communications or non-factual attorney work-product describing legal advice provided to the corporation “before, during, and after the underlying [alleged] misconduct. . . .”[xv] Some of the privileged information sought may include, among other things, attorney notes, memoranda or reports regarding mental impressions and conclusions, as well as legal advice. The McNulty Memorandum does caution federal prosecutors to only seek Category II Information in the rarest of circumstances, and requires the prior approval of the Deputy Attorney General for a request of this type of information to a business entity.

The McNulty Memorandum does not, however, apply to Category II information where the legal advice sought is part of the corporation’s “reliance upon counsel” defense or where the advice was sought in furtherance of a crime or fraud covered by the crime/fraud exception to the attorney-client privilege.[xvi] This information is not considered privileged, and is open to disclosure.

The Great Exclusion

Nonetheless, these “protections” do not apply to a business entity’s “voluntary” offer of waiver. This aspect of the McNulty Memorandum leaves a hole that a virtual tractor trailer truck would be able to navigate with ease.

The DOJ, essentially, with a “wink and nod,” announces that corporations have these procedural protections, but “voluntary” offers would provide great benefits to a business entity. One wonders if the DOJ truly ever believed this “voluntary” avenue would be ignored when a corporation faces potential significant liability especially in light of the Filip Letter. Such a provision almost assumes that any corporation (who hires any white collar criminal defense lawyer that breathes) will recognize “voluntary” offers of waiver will bring about greater benefits than a “request” for such information from an assistant United States Attorney.

Accordingly, such an exception renders the alleged “moderation” effort of the McNulty Memorandum to be meaningless.

Picking the Charge and Corporate Plea Agreements

The McNulty Memorandum also addresses (albeit in passing) the federal prosecutor’s duty to select the actual and appropriate criminal charge against a corporation.

Such determinations are made when federal prosecutors decide that a criminal prosecution is warranted against the business entity. Federal prosecutors are reminded that recommending a grand jury charge against a particular corporation must only be done when there exists well-documented criminal conduct. Again, the McNulty Memorandum suggests that these decisions are to be done on an individualized basis, and, in line, with the Federal Criminal Code as well as the United States Attorney’s Manual.

The McNulty Memorandum also reminds federal prosecutors of their ability to use corporate plea agreements to resolve these matters, and, essentially, refers federal prosecutors to various provisions in the United States Attorney’s Manual requiring certain terms to be included in the plea agreement. These plea agreements should address punishment, deterrence, rehabilitation and compliance in the corporate context. Of course, there is recognition for special circumstances, but federal prosecutors should not agree to accept a corporate guilty plea in exchange for some form of a non-prosecution or dismissal of charges against the business entity’s individual officers or employees.

The Attorney-Client Privilege Protection Act of 2007

In response to the DOJ’s attacks on these privileges and despite the McNulty Memorandum, Congress and the organized legal bar, such as the American Bar Association, entered the fray, and supported additional attempts to reform the DOJ’s practices.[xvii]

Bills were introduced in both the Senate and the House of Representatives under the title of the Attorney-Client Privilege Protection Act of 2007. Senator Arlen Spector (R-PA), a former prosecutor, has sheparded this legislation through Congress. If enacted, this legislation would preclude the DOJ from requesting attorney-client or work product information as well as prohibiting its use as a condition or factor relating to charging or cooperation with a person or organization. Further, this legislation would not allow the DOJ or other government agencies to use the payment of attorney’s fees, joint defense agreements or the failure to terminate employees, among other things, as evidence of a failure to cooperate by a business entity or individual.

In November 2007, the House of Representatives passed this legislation, and it now awaits Senate approval.

The Filip Letter

Not to be outdone, the DOJ was concerned with the possibility that this legislation would curtail their efforts in prosecuting business entities. The result was the Filip Letter.

In this simple 3 page letter, Deputy Attorney General Filip attempts to assuage the fears of numerous groups as well as Congress. The Filip Letter describes the efforts made by the DOJ to review the McNulty Memorandum, including the meetings held with various interested groups, among them, the criminal defense bar, former government officials and civil liberties advocates. After these meetings, the Filip Letter noted that the DOJ still maintained certain key differences, however, there was agreement “in the areas of joint defense agreements, attorneys’ fees, and employee sanctions.”[xviii]

The Filip Letter then went onto state the DOJ would revise -- in a few weeks -- the McNulty Memorandum in five key areas:

  • The DOJ will only measure cooperation “by the extent to which a corporation discloses relevant facts and evidences, not its waiver of privileges.” The “key measure” will now be “to what extent has the corporation timely disclosed the relevant facts about the misconduct?” Waiving privileges will not be considered.
  • No longer will “Category II” information (described above—actual attorney-client communications) be a condition for cooperation, except, of course, if it is part of the furtherance of a crime, fraud or advice of counsel defense.
  • The advancement of attorney’s fees or provision of counsel by a corporation to its employees will not be used to evaluate corporate cooperation.
  • Entering into joint defense agreements will not be considered when evaluating cooperation. However, the DOJ may still ask a corporation to refrain from to disclose sensitive information that the DOJ has provided to it, and then evaluate the corporation if it has abided by that request.
  • Sanctioning or retaining corporate employees will not be considered when evaluating cooperation; however, such a fact may be considered in evaluating a remedial program. For example, one surmises that, if the target of the DOJ criminal investigation is placed in charge of the revamped compliance program, it is a fair assumption that the DOJ will not be pleased with such remedial measures.[xix]

Finally, the Filip Letter recognizes the preeminent role of the attorney-client privilege in the legal system as well as its importance in the criminal justice system.

Conclusion

In sum, the McNulty Memorandum and the Filip Letter (and any subsequent reiteration) require careful review to understand the DOJ charging process for business entities. These DOJ pronouncements are not a retrenchment by the DOJ of its pursuit of corporate wrongdoers or its ability to seek and obtain harsh and significant sanctions against these entities, but policy statements indicating its strong and never ending war on corporate crime. However, it seems strange that such important issues are being driven by those who prosecute crime, such a set-up does not inspire confidence or provide sufficient protection for the attorney-client or work product privileges. Such privileges and any waivers should not be the province of the DOJ. Essentially, allowing the DOJ to control this process will allow future less progressive (has there ever been an administration that is less progressive?) DOJs to revert to the previous form. Accordingly, regardless of the follow-up to the Filip Letter, Congress needs to complete its work in this area to cease the erosion of these privileges, and restore the balance between proper law enforcement techniques and a business entity’s right to seek, obtain and utilize effective assistance of counsel.

Notes:
[i] Memorandum from Deputy Attorney General Paul J. McNulty entitled Principles of Federal Prosecution of Business Organizations (December 12, 2006), http://justice.gov/dag/speech/2006/McNulty-memo.pdf (“McNulty Memorandum”).
[ii] Letter to The Honorable Patrick J. Leahy and The Honorable Arlen Specter from Mark Filip, Deputy Attorney General, dated July 9, 2008.
[iii] Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, Exchange Act Release No. 44969 (October 23, 2001)
[iv] Douglas I. Koff and Jason Jurgens, “CFTC Yields More Conflicting Advice on Privilege Waiver,” New York Law Journal, April 13, 2007.
[v] 435 F. Supp. 2d 390 (S.D.N.Y. 2006)
[vi] McNulty Memorandum at p. 8.
[vii] U.S. v. Stein, 495, F. Supp 2nd 390 (S.D.N.Y. 2007).
[viii] Id.
[ix] N. Richard Javis, “The McNulty Memorandum, Much Ado About Nothing,” Washington Lawyer, (February 2007).
[x] McNulty Memorandum at p. 8.
[xi] Id at pp. 8-9.
[xii] Id. at p. 9.
[xiii] Id.
[xiv] Id.
[xv] Id. at 10.
[xvi] Id.
[xvii] Statement of the American Bar Association to the Committee on Judiciary of the United States Senate, “Examining approaches to Corporate Fraud Prosecutions and the Attorney-Client Privilege under the McNulty Memorandum” (September 18, 2007.)
[xviii] Filip Letter, p. 2.
[xix] Id., pp. 2-3.